What is Bitcoin, it's Characteristics and Challenges?
Before I jump in depth to Bitcoin, you should be able to differentiate between Bitcoin and Blockchain. In one sentence, Bitcoin is a form of digital currency created and held electronically. And Blockchain is a technology behind it. Now lets get in depth.
What is Bitcoin?
In 2009, unknown programmer or a group of programmers, under the name Satoshi Nakamoto invented Bitcoin by releasing it as open source software. Open Source Software basically means anyone has the right to study, change and distribute the software to anyone and for any purpose.
Bitcoin is a form of digital currency, also called crypto-currency because its existence relies on cryptography – the branch of mathematics related to keeping information secret. No one controls it. No one prints it. This currency isn’t physically printed in the shadows by a central bank. In other words, Bitcoins aren’t printed like dollars or euros, instead, a community of people that anyone can join creates Bitcoin digitally.
The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a Blockchain. Since the system works without a central repository or single administrator, Bitcoin is called the first decentralized digital currency.
How is Bitcoin produced?
In traditional fiat money systems, governments simply print more money when they need to. But in Bitcoin, money isn’t printed at all – it is discovered. Computers around the world ‘mine’ for coins by competing with each other. Please find about mining in my other video.
People are sending Bitcoins to each other over the Bitcoin network all the time, but unless someone keeps a record of all these transactions, no-one would be able to keep track of who had paid what. The Bitcoin network deals with this by collecting all of the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions, and write them into a general ledger. In return, they get incentives in the form of Bitcoin. This way new coins are produced in every block.
The maximum number of Bitcoin produced will only be only 21 million. This makes the coin deflationary. This means the value of Bitcoin will only increase due to limited supply. While some economist believe that supply cap or built in deflation is not an inherent strength for a would-be-money. Moneys strength is in its ability to meet society’s needs. It’s debateable, but let’s leave it to the economists.
Characteristics of Bitcoin
Decentralized
One central authority doesn’t control the Bitcoin network. Every machine that mines Bitcoin and processes transactions makes up a part of the network, and the machines work together. And if some part of the network goes offline for some reason, the money keeps on flowing.
Easy to set up
You can set up a Bitcoin address in seconds, no questions asked, and with no fees payable. Whereas, in conventional banks you may have to go a long process.
Anonymous
Bitcoin is often described as an anonymous currency because it is possible to send and receive Bitcoins without giving any personally identifying information. However, achieving reasonable anonymity with Bitcoin can be quite complicated and perfect anonymity may be impossible.
Transparent
Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the Blockchain. The Blockchain tells all.
Transaction fees are miniscule
The bank may charge you a lot of fee for international transfers. Bitcoin doesn’t.
Fast
You can send money anywhere and it will arrive minutes later, as soon as the Bitcoin network processes the payment.
Non-repudiable
When your Bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.
Challenges of Bitcoin:
Uncertain regulatory status
Because modern currencies have always been created and regulated by national governments, Blockchain and Bitcoin face a hurdle in widespread adoption by pre-existing financial institutions.
Large energy consumption
The Bitcoin Blockchain network’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power.
Control, security, and privacy
While solutions exist, including private or permissioned Blockchain and strong encryption, there are still cyber security concerns that need to be addressed before the general public will entrust their personal data to a Blockchain solution.
Integration concerns or Cultural adoption
Blockchain applications offer solutions that require significant changes to, or complete replacement of, existing systems. In order to make the switch, companies must strategise the transition.
The centralisation of Bitcoin
Although Bitcoin was built with good intentions in mind, noble systems are often exploited. And this is what has happened to the Bitcoin network. The problem is that there is little incentive to run a node anymore. That’s because powerful machines built specifically for Bitcoins SHA-256 proof-of-work algorithm have changed its decentralized and more open nature. This has, in effect, concentrated Bitcoins confirmation power, leaving it in the hands of only those who can afford thousands of dollars of ASIC hardware.
What do you think, Is Bitcoin a Currency or commodity?
Source:
- Coindesk, What is Bitcoin? 20th March 2015
- The economist, Bitcoins deflation problem, 3rd April 2014, RA
- Deloitte, 2017, Blockchain technology: 9 benefits & 7 challenges
- Coindesk, The five biggest threats facing Bitcoin, May 26 2014